In Star America Rail Holdco, LLC v. Casey Cathcart and Cathcart Rail Holdco, LLC, C.A. No. 2024-0883-LWW, the Delaware Court of Chancery considered whether unambiguous LLC agreement terms allowed an outside investor to remove a company's CEO without the board's consent. The Court decided that unambiguous terms of an agreement prevail, and the investor was entitled to remove the CEO under those terms.
Of relevance to this case, Section 18-110 of the Delaware Limited Liability Company Act ("Act") provides that the Delaware Court of Chancery may "determine the validity of any admission, election, appointment, removal or resignation of a manager of a limited liability company, and the right of any person to become or continue to be a manager of a limited liability company". 6 Del. C. § 18-110.
Background
Cathcart Rail HoldCo, LLC (the "Company") is a privately held Delaware limited liability company. It owns 100% of the membership interests of Cathcart Rail, LLC—an Illinois entity that operates in the railroad industry. In 2015, Casey Cathcart and his father Thom formed Cathcart, Inc. (formerly T&C Rail Holdings, Inc.). They subsequently formed the Company, with Cathcart, Inc. as its sole member, to acquire a railcar repair facility.
In 2020, Cathcart was approached by Tikehau Star Infra—an infrastructure asset investor—about a potential investment in the Company. Cathcart accepted the offer. Tikehau Star Infra established Star America Rail HoldCo, LLC ("Star Infra") to hold its investment in the Company. Star Infra became a member of the Company and invested a total of $70 million.
The Company's performance started to falter. The parties then exchanged proposals for amending the Company's limited liability company agreement and Subscription Agreement. The proposals all contemplated that Cathcart would step down as CEO by a set date. The parties negotiated whether Star Infra would have the sole discretion to select a new CEO or whether the Company's board would have a say, with the parties agreeing to a tiered performance threshold for replacing the CEO.
The parties amended the Company's limited liability company agreement (the "LLC Agreement"). The LLC Agreement adopted a two-tier performance threshold for replacing the Company's CEO. If 2023 Actual EBITDA was less than $21 million but greater than $18 million, the Company's board would launch a CEO search "subject to the consent of Star Infra and Cathcart Inc. (not to be unreasonably withheld . . .)." If 2023 Actual EBITDA was less than $18 million, Star Infra had the unilateral right to "terminate" Cathcart as CEO and "hire a replacement" on "terms and conditions" set in its "sole and absolute discretion."
In January 2024, the Company CFO sent Star Infra a calculation showing 2023 Actual EBITDA of $17.6 million and later confirmed this number in reports. Star Infra then hired Jeff Chick as the new CEO of the Company. Cathcart resisted his replacement as CEO, claiming the 2023 Actual EBITDA was over $18 million.
Star Infra filed an action under Section 18-110 of the Act. It sought a declaration that Cathcart was removed as CEO and replaced by Chick pursuant to the LLC Agreement.
Star Infra claimed that it was exercising its right under Section 8.3(a) of the LLC Agreement to immediately replace Cathcart with Chick as CEO while Cathcart contended that Cathcart, Inc.'s approval was required before the Company's CEO could be removed or a new CEO appointed. He also raised an affirmative defense under the implied covenant of good faith and fair dealing concerning Chick's selection.
The parties stipulated that the Company's 2023 Actual EBITDA was below $18 million. Since EBITDA fell below $18 million, Star Infra had the right to "search" for a new CEO, "terminate" Cathcart as CEO, and "hire" a replacement CEO. It could do so on "terms and conditions" determined in its "sole and absolute discretion." The Court found that nothing in the LLC Agreement limited Star Infra's exercise of this unambiguous right, therefore, Star Infra's removal and replacement of Cathcart was valid under the LLC Agreement.
Key Takeways
- In Section 18-110 suits, "the starting (and end) point almost always is the parties' bargained-for operating agreement, and the court's role in these disputes is to 'interpret [the] contract [and] effectuate the parties' intent.'"
- The court will "give priority to the parties' intentions as reflected in the four corners of the agreement" by construing the agreement as a whole and giving effect to all included provisions.
- "When [a] contract is clear and unambiguous," the court must "give effect to the plain-meaning of the contract's terms and provisions without resort to extrinsic evidence."
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